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| Germany readies itself for more woe as scandal and slowdown hit economy | |
| (35 minutes later) | |
| When the German football team lost 1-0 to the Republic of Ireland on Thursday night in a European championship qualifying match, it capped a grim week for national pride. | When the German football team lost 1-0 to the Republic of Ireland on Thursday night in a European championship qualifying match, it capped a grim week for national pride. |
| The shock defeat on the football field followed the ritual grilling of Michael Horn, the US boss of disgraced car-maker Volkswagen, by the US Congress; record losses at the country’s biggest bank, Deutsche Bank; and a clutch of dire economic figures, including the sharpest drop in exports since 2009. | The shock defeat on the football field followed the ritual grilling of Michael Horn, the US boss of disgraced car-maker Volkswagen, by the US Congress; record losses at the country’s biggest bank, Deutsche Bank; and a clutch of dire economic figures, including the sharpest drop in exports since 2009. |
| Suddenly, the health of Germany’s economy, powerhouse of the 19-member eurozone, is under question, just as the slowdown in emerging markets, including China, starts to take its toll. | Suddenly, the health of Germany’s economy, powerhouse of the 19-member eurozone, is under question, just as the slowdown in emerging markets, including China, starts to take its toll. |
| Volkswagen, for decades the ultimate symbol of lean, beautifully engineered German industry, is a byword for shoddy corporate practices since it admitted to deceiving regulators over emissions from its diesel cars. Horn apologised during the bruising congressional hearing, and was forced to concede that it was “very hard to believe” that the scandal was the work of a few rogue engineers. | Volkswagen, for decades the ultimate symbol of lean, beautifully engineered German industry, is a byword for shoddy corporate practices since it admitted to deceiving regulators over emissions from its diesel cars. Horn apologised during the bruising congressional hearing, and was forced to concede that it was “very hard to believe” that the scandal was the work of a few rogue engineers. |
| Ben May of consultancy Oxford Economics says it is not yet clear how the Volkswagen scandal will affect the wider German economy, but it could have a considerable impact if it undermines confidence in diesel cars generally. | Ben May of consultancy Oxford Economics says it is not yet clear how the Volkswagen scandal will affect the wider German economy, but it could have a considerable impact if it undermines confidence in diesel cars generally. |
| “Diesel cars are the speciality of European manufacturers,” he says. “If you start to see buyers ditch diesel, or policymakers put in place regulations that mean it’s harder to produce cheap, compliant diesel cars, you might see Japanese and American producers gaining a bigger share of the European market.” | “Diesel cars are the speciality of European manufacturers,” he says. “If you start to see buyers ditch diesel, or policymakers put in place regulations that mean it’s harder to produce cheap, compliant diesel cars, you might see Japanese and American producers gaining a bigger share of the European market.” |
| Extra spending to accommodate 800,000 migrants from Syria and elsewhere will boost German GDP by 3%, says Goldman Sachs | Extra spending to accommodate 800,000 migrants from Syria and elsewhere will boost German GDP by 3%, says Goldman Sachs |
| Meanwhile Frankfurt-based Deutsche Bank, which is being reshaped by its new boss, John Cryan, announced its largest-ever loss, more than €6bn, in the third quarter. Shareholders welcomed the announcement as a signal that Cryan was taking an aggressive approach to turning Deutsche Bank around, and would not be asking them to contribute more capital. | Meanwhile Frankfurt-based Deutsche Bank, which is being reshaped by its new boss, John Cryan, announced its largest-ever loss, more than €6bn, in the third quarter. Shareholders welcomed the announcement as a signal that Cryan was taking an aggressive approach to turning Deutsche Bank around, and would not be asking them to contribute more capital. |
| But news that another pillar of the German corporate establishment looked shaky added to the sense of uncertainty. Germany’s economic model is heavily dependent on exports, including to fast-growing emerging economies, a specialism that has served it well in recent years. | But news that another pillar of the German corporate establishment looked shaky added to the sense of uncertainty. Germany’s economic model is heavily dependent on exports, including to fast-growing emerging economies, a specialism that has served it well in recent years. |
| But analysts say the sharp decline in exports – they fell by more than 5% in August – could be the first solid evidence that the downturn in emerging markets has started to hit home in Europe. Factory orders and industrial output also look weak. | But analysts say the sharp decline in exports – they fell by more than 5% in August – could be the first solid evidence that the downturn in emerging markets has started to hit home in Europe. Factory orders and industrial output also look weak. |
| Chinese economic growth has slowed, and there are growing fears that it could face a “hard landing”, as Beijing battles to cope with a stock market crash and a troubled banking sector. | Chinese economic growth has slowed, and there are growing fears that it could face a “hard landing”, as Beijing battles to cope with a stock market crash and a troubled banking sector. |
| “Germany is more exposed,” says Jonathan Loynes of consultancy Capital Economics. “It sends a bigger proportion of its exports to China than most European countries, so I would expect it to be affected first, and hardest.” | “Germany is more exposed,” says Jonathan Loynes of consultancy Capital Economics. “It sends a bigger proportion of its exports to China than most European countries, so I would expect it to be affected first, and hardest.” |
| Loynes believes the worst of the Chinese downturn is already over and doesn’t expect a sharp downturn in German growth. But he thinks the hit to eurozone growth from slowing emerging economies may be enough to persuade the European Central Bank to extend its quantitative easing programme. | Loynes believes the worst of the Chinese downturn is already over and doesn’t expect a sharp downturn in German growth. But he thinks the hit to eurozone growth from slowing emerging economies may be enough to persuade the European Central Bank to extend its quantitative easing programme. |
| Under chairman Mario Draghi, the ECB has been creating €60bn each month and using it to buy government bonds, in a bid to prevent the eurozone economy from sliding into deflation. | Under chairman Mario Draghi, the ECB has been creating €60bn each month and using it to buy government bonds, in a bid to prevent the eurozone economy from sliding into deflation. |
| The onset of QE helped weaken the euro and appeared to boost growth: eurozone GDP expanded by a relatively healthy 0.5% in the second quarter of the year. But the value of the single currency has since bounced back somewhat, just as demand from China is weakening. | The onset of QE helped weaken the euro and appeared to boost growth: eurozone GDP expanded by a relatively healthy 0.5% in the second quarter of the year. But the value of the single currency has since bounced back somewhat, just as demand from China is weakening. |
| “We could see a more substantial slowdown coming through, which would up the pressure on the ECB to provide more support,” Loynes says. | “We could see a more substantial slowdown coming through, which would up the pressure on the ECB to provide more support,” Loynes says. |
| The QE programme is meant to end next September, but Loynes expects it to be extended. Draghi could also speed it up, creating more than €60bn a month. | The QE programme is meant to end next September, but Loynes expects it to be extended. Draghi could also speed it up, creating more than €60bn a month. |
| Economists point to one potential, short-term boon for the German economy: the extra it will have to spend to accommodate the influx of refugees from Syria and other troubled states in the coming months. Germany is expecting to accept up to 800,000 immigrants, as its contribution to the biggest refugee crisis in living memory. Economists at Goldman Sachs estimate that that could require €9bn of extra public spending, adding up to 3% to Germany’s GDP. | Economists point to one potential, short-term boon for the German economy: the extra it will have to spend to accommodate the influx of refugees from Syria and other troubled states in the coming months. Germany is expecting to accept up to 800,000 immigrants, as its contribution to the biggest refugee crisis in living memory. Economists at Goldman Sachs estimate that that could require €9bn of extra public spending, adding up to 3% to Germany’s GDP. |
| “Refugees differ from economic migrants in that they have few, if any, resources on arrival in the destination country. Consequently, government financial support, which provides refugees with clothing, food and housing, will feed directly into the economy,” Goldman said, in a note. | “Refugees differ from economic migrants in that they have few, if any, resources on arrival in the destination country. Consequently, government financial support, which provides refugees with clothing, food and housing, will feed directly into the economy,” Goldman said, in a note. |
| Once refugees are more established, and able to join Germany’s workforce, they could help to offset the problem of its rapidly ageing population – if the country’s policymakers can successfully navigate the considerable social and political challenges of absorbing such a large influx. Meanwhile, the symbols of their adopted country’s world-beating prowess, from football to cars, look somewhat tarnished. | Once refugees are more established, and able to join Germany’s workforce, they could help to offset the problem of its rapidly ageing population – if the country’s policymakers can successfully navigate the considerable social and political challenges of absorbing such a large influx. Meanwhile, the symbols of their adopted country’s world-beating prowess, from football to cars, look somewhat tarnished. |